Patent Reform Will Stifle Innovation

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I believe the proposed patent reform act would stifle innovation, which already has many hurdles to overcome, particularly in the earliest stages (when foundational patents are filed). To arbitrarily limit damages and to make it easier to challenge patents shifts the balance further in favor of large companies and lowers the incentive of innovators and technology licensing offices at universities to file and support patents that could have an impact on healthcare, the environment and quality of life. I have heard that there are different views between biotech and information technology “innovators” on this subject and am curious if anyone from the technology (start-up or academic innovator) side can give his/her perspective. I understand how this could be helpful to large companies but how is this helpful to innovation?

Daphne Zohar is the co-founder and CEO of PureTech, a Boston-based life sciences firm focused on translating academic innovation into commercial success. Follow @daphnezohar

11 responses to “Patent Reform Will Stifle Innovation”

From my reading, the current Patent Reform Act could help ameliorate some problems, especially in the computer, electronics, and medical diagnostics fields by combating the proliferation of so-called “patent trolls” who prey on successful technologies once they become viable and established (think Blackberry); and curbing the ability of these nuisance plaintiffs to pick the most favorable court venues to bring their cases.

I have long predicted that we would see an upsurge in lengthy and intractable fights in high-tech fields and we have–with more undoubtedly ahead. If you haven’t seen it, I direct your attention to the work of James Bessen and Michael Meurer. (See for instance, this recent story from the NYTimes about their work.) Bessen and Meurer, looking at data from 1976-1999, show that patent litigation is so costly that, on average, especially in the information technology field, patents have arguably done more harm than good (with litigation costs outweighing profits directly attributable to patents on an annual basis.)

My own view, as I argued in my 1999 book, Owning the Future, is that the current U.S. Patent System too often stifles the innovation it was intended to encourage. Today, the system arguably serves the pharmaceutical industry well by affording enough protection to drugs that the industry can attract ample venture capital. But with patent litigation at all time highs and a slew of overlapping and conflicting patents having been granted in recent years, I see a good deal of trouble ahead. From that vantage point, the current reform efforts seem mostly like a step in the right direction.

That’s an interesting perspective regarding the US Patent System. I’ll have to read your book…

Patent trolls aside, often when we are licensing a key foundational patent into a start-up company we have formed, there are additional supporting patents required to strengthen the portfolio and make it viable. For example, the original patent filing at the university may have been rushed and driven by an upcoming journal publication. Furthermore, the technology office at the institution sometimes doesn’t support international filings due to budget constraints or doesn’t really spend the time and money to look at prior art and freedom to operate so hasn’t crafted the ideal claims.

Therefore, we as the start-up company/investor need to build protection around the original innovation through supporting patents. Without those supporting patents and the knowledge that they have potential to stop infringers, the original foundational patents would perhaps not get licensed, funded and developed.

Seth – It would be interesting to get your thoughts about how innovations would be developed in a world where the US Patent System was completely overhauled (imagine one was going even further than this current proposed reform act). In that world, how would the incentive mechanisms be structured to encourage the translation of discoveries into commercially driven products?

I’m a bit too pressed today to do it justice but here are a couple thoughts:

I like patents best when they are: 1. specific, and 2. airtight enough to discourage challenges.

Too many of today’s patents are neither.

Looking back, it seems clear that the U.S. Patent system worked best in the glory days of the latter half of the 19th century when they still required working models and most of the important patents—for things like the lightbulb and combustion engine—were clear and tangible. The system clearly helped inventors quickly and efficiently turn new technologies into marketable products.

Some of my main beefs today are that we are patenting things too far upstream from the marketplace. This can stifle innovation, lead to confusion in a given field on the part of innovators and investors, and it also risks lengthy and costly legal disputes down the line.

I don’t have all the answers, but one idea is to bring tried and true notions from other areas of the law into the patent system. From land ownership, for instance, I’d bring in ideas like: 1. A kind of “National Park System” of IP-Free Zones. For instance, I think the human genome should be patent free and only products built from its information ought to deserve patent protection. 2. Zoning. I think there should often be shades of ownership rights over IP just as zoning ordinances allow you to own a piece of property but limit what you can do with it. In some cases, for instance, I think there ought to be clearer rules about licensing so patents can’t be used solely to block innovative competitors and so access isn’t blocked to academic researchers.

Most of all, though, I’d like to see the bar raised enough that we get back to a system that affords strong protection to things that seem more like technological products rather than increasingly shaky protection for overlapping tools, methods, and concepts.

Seth is not wrong—in fact most folks would agree with him that patents ought to be harder to get and harder to bust.

The problem is simply that the Patent Reform Act of 2007 does nothing to address his concerns. At a time when our nation should be debating how to make patents to protect our nation’s intellectual property (a $5.5 trillion estate, by the way) in our global economy, the Bill does absolutely nothing to address improving patent quality pre-grant. Its most controversial provisions all simply make patents cheaper to infringe: the post-grant opposition provision makes issued patents easier to bust, the damages provisions make patents cheaper far easier to infringe, and the venue provisions over-correct the E.D.Texas issue and limit access to the courts to slow, infringer friendly venues.

So, with injunctions now virtually unavailable as a remedy to patent holders (U.S. Supreme Court’s decision in eBay v. MercExchange), the RIM/Blackberry situations are already a thing of the past. But if this Bill passes, patent holders will be subject to serial challenges to their patents, find themselves in a low-cost, compulsory licensing dynamic that reduces the cost of infringement and the value of successfully commercialized technology, and be left with crowded, and increasingly longer court dockets. So, to your point, the Bill will have an adverse impact the early-stage, research component of our nation’s innovation economy.

By the way, in addition to the Globe and MIT, the Chief Judge of the Federal Circuit Court of Appeals, the Advanced Medical Technology Association, the American Association of Universities, the Association of University Technology Managers, the Biotechnology Industry Organization, the California Health Institute, the Center for Small Business and the Environment, the Coalition for 21st Century Patent Reform (Caterpillar, 3M, DuPont, Corning, Motorola, Texas Instruments, Procter & Gamble, General Electric, and others), IEEE-USA, the Innovation Alliance, the Intellectual Property Owner’s Association, the Medical Device Manufacturers Association, the Massachusetts Biotechnology Council, the NanoBusiness Alliance, the National Association of Manufacturers, the National Venture Capital Association, PhARMA, the Small Business Technology Council, the State of New Hampshire, and U.S. Business & Industry Council have all chimed in with their own concerns on the Bill and would seem to agree with you as well.

Bryan makes such a good case that he–almost–makes me reconsider my guarded support for the current patent reform effort. My view as an outsider and sometime-chronicler is that things are pretty much of a mess and likely to get worse. Bryan is absolutely right about the backlog problem. I did a short piece on this a while back and was relatively shocked to learn that in some high-tech fields patent pendancy is now in the neighborhood of four years! How can we possibly have a viable system with that kind of delay?

Meanwhile, though, I have to say I like some of the provisions that have been discussed in this current round of patent reform. Certainly the venue shopping we’ve seen of late should be seen as an unacceptable gaming of the system; I think a lot of overly broad and overly obvious patents have been issued in recent years that threaten to stall innovation so there should be better means for post-grant challenges, even if it means some hardship in the short to medium term for patent holders. With the recent U.S. Supreme Court decision in KSR v. Teleflex on obviousness (see my xconomy piece), I think we’re likely to see such challenges no matter what. From talking to a variety of folks in different high-tech fields, I think the biggest concern right now ought to be that so many junk patents have been issued that they have led to a great deal of uncertainty with many folks to basically ignoring the patent thicket to some extent. It makes me think that, whatever the problems of the current patent reform effort, the status quo is probably not too great for early-stage innovators either.

Patent infringement suits are virtually always conducted in Federal District Court, presided over by a District Judge. Of necessity, these judges are usually generalists, hearing a drug case in the morning and a federal tort claim for a mail carrier rear-ending a school bus in the afternoon.

Patent law is an exotic realm and judges in some districts may not hear a single patent case in a year. Due in part to the fact that federal judges are appointed for life, there is a wide variation between judges in how rapidly they move cases forward. It is human nature to go slowly in a task that is unfamiliar. A patent infringement suit tried by a judge with little expertise in patent law can easily take 4-5 years.

A few district courts have adopted a “rocket docket”, a series of local court rules that prescribes specific time frames for each stage in a lawsuit. In rocket docket districts, patent infringement cases often conclude in 12-18 months. Additionally, some districts have consciously developed an expertise in patent cases and have special local rules governing patent cases that are designed to move those cases along expeditiously.

There is a high correlation between the length of time necessary to get a case to trial and total attorneys fees for both sides. When a large company is sued for patent infringement (or almost anything else), explicit or implied instructions to defense counsel virtually always include direction to drag out the case for as long as possible. Plaintiffs can run out of money or get discouraged and settle cheaply. Paying $1 million in damages in 2012 is better than paying the same sum in 2008. From the standpoint of defense counsel, who are almost always charging by the hour, delaying a case takes work and is financially beneficial.

From a plaintiff’s standpoint, “forum shopping” often means choosing a court that will move the case along as quickly as possible under the direction of a judge who knows something about patent law. The more knowledgeable the judge is about patent law, the more predictable his/her rulings will be and the more likely that the trial court’s decision will be upheld on appeal.

The Eastern District of Texas is often cited by infringement defendants as the prime example of abusive forum shopping. This court has significant expertise in patent litigation plus a reputation for moving infringement cases to trial quickly. Due to the demographic makeup of the district (not many urban areas), this court handles fewer drug cases than many other courts, so when an infringement case is set for trial, the chances of it being bumped in favor of a drug trial are lower than elsewhere.

In ED-TX patent infringement trials held in 2007 to date, 50% of the verdicts have been for plaintiffs and 50% for defendants, a worse outcome for plaintiffs than the average of infringement cases held in other courts. While this district has issued some large infringement verdicts, the poster child cases for “patent reform” have taken place in other courts. The $1.5 billion verdict against Microsoft happened in San Diego. The RIM Blackberry case was tried in Richmond, Virginia.

EBay decision combined with the damage apportionment provision of the current patent “reform” will affect all of us, small non-manufactoring patent holders, in the most negative way. If passed, this “reform” will finish all of us, independent inventors in this great country, and will completely destroy venture capital funding of high-tech startups as it exists today. Just my 2 cents…